| We have experienced significant operating losses since our inception and expect these losses to continue for some time |
| We incurred losses from operations of dlra5dtta9 million in 2003, dlra6dtta7 million in 2004 and dlra6dtta1 million in 2005 |
| As of December 31, 2005, our accumulated deficit was dlra61dtta2 million |
| Our losses result primarily from research and development, general and administrative expenses |
| We have not generated, and we may never generate sufficient revenue from product sales to cover our operating expenses |
| We will need to generate significant revenue to continue our research and development programs and achieve profitability |
| We cannot predict when, if ever, we will achieve profitability |
| The market for genetic risk assessment tests is unproven |
| The market for genetic risk assessment tests is at an early stage of development and may not continue to grow |
| The general scientific community, including us, has only a limited understanding of the role of genes in predicting disease |
| When we identify a gene or genetic marker that may influence risk for disease, we conduct clinical trials to confirm the initial scientific discovery and to establish the scientific discovery’s clinical utility in the marketplace |
| The results of these clinical trials could limit or delay our ability to bring the test to market, reduce the test’s acceptance by our customers or cause us to cancel the program, any of which would limit or delay sales and cause additional losses |
| The marketplace may never accept our products, and we may never be able to sell our products at a profit |
| We may not complete development of or commercialize our other genetic risk assessment tests |
| The success of our genetic risk assessment tests will depend upon their acceptance as medically useful and cost-effective by patients, physicians, dentists, other members of the medical and dental community and by third-party payers, such as insurance companies and the government |
| We can achieve broad market acceptance only with substantial education about the benefits and limitations of genetic risk assessment tests |
| The market for personalized health is unproven |
| The competition in the field of personalized health is not well defined due to a lack of an established market and customer base |
| The concept is new and requires consumers to do things differently, hence may be considered a “disruptive technology” |
| Adoption of such technology requires substantial market development |
| Activities in these areas remain small and the overall market is unproven |
| There can be no assurance that these products will be successful upon launch or that they can be sold at sufficient volume to make them profitable |
| If customers do not accept our tests, or take a longer time to accept them than we anticipate, then it will reduce our anticipated sales, resulting in additional losses |
| We rely heavily on third parties to perform sales, marketing and distribution functions on our behalf, which could limit our efforts to successfully market products |
| We have limited experience and capabilities with respect to distributing, marketing and selling genetic risk assessment tests |
| We have relied and plan to continue to rely significantly on sales, marketing and distribution arrangements with third parties, over which we have limited influence |
| If these third parties do not successfully market our products, it will reduce our anticipated sales and increase our losses |
| If we are unable to negotiate acceptable marketing and distribution agreements with future third parties, or if in the future we elect to perform sales, marketing and distribution functions ourselves, we will incur significant costs and face a number of additional risks, including the need to recruit experienced marketing and sales personnel |
| While Alticor has far more experience and success in marketing, selling and distributing products than we do, we are dependent upon their success, and their failure to successfully market our products could reduce our anticipated sales and increase our losses |
| 17 ______________________________________________________________________ If we fail to obtain additional capital, or obtain it on unfavorable terms, then we may have to end our research and development programs and other operations |
| We expect that our current and anticipated financial resources are adequate to maintain our current and planned operations through mid-2007 |
| If we are not generating sufficient cash or cannot raise additional capital prior to that date, we will be unable to fund our business operations and will be required to seek other strategic alternatives |
| Our future capital needs depend on many factors |
| We will need capital for the commercial launch of additional genetic tests, continued research and development efforts, obtaining and protecting patents and administrative expenses |
| Additional financing may not be available when needed, or, if available, it may not be available on favorable terms |
| If we cannot obtain additional funding on acceptable terms when needed, we may have to discontinue operations, or, at a minimum, curtail one or more of our research and development programs |
| Because a single shareholder has a controlling percentage of our voting power, other stockholders’ voting power is limited |
| As of December 31, 2005, a single stockholder owned, or had rights to own approximately 57dtta4prca of our outstanding common stock |
| Accordingly, this stockholder may be able to determine the outcome of stockholder votes, including votes concerning the election of directors, the adoption or amendment of provisions in our Certificate of Incorporation or By-Laws and the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets |
| This stockholder may make decisions that are adverse to other stockholders’ or warrantholders’ interests |
| This ownership concentration may also adversely affect the market price of our common stock |
| Three of our four directors are individuals chosen by this single stockholder and that stockholder has the right to choose an additional director |
| These directors might pursue policies in the interest of this single stockholder to the detriment of our other stockholders |
| The Series A Preferred Stock has certain rights which are senior to common shareholder rights and this may reduce the value of the common stock |
| The Series A Preferred Stock, which was issued to Alticor in March 2003, accrues dividends at the rate of 8prca of the original purchase price per year, payable only when, as and if declared by the Board of Directors and are non-cumulative |
| If we declare a distribution, with certain exceptions, payable in securities of other persons, evidences of indebtedness issued by us or other persons, assets (excluding cash dividends) or options or rights to purchase any such securities or evidences of indebtedness, then, in each such case the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though the holders of the Series A Preferred Stock were the holders of the number of shares of our common stock into which their respective shares of Series A Preferred Stock are convertible as of the record date fixed for the determination of the holders of our common stock entitled to receive such distribution |
| In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holders of the Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of our assets or surplus funds to the holders of our common stock by reason of their ownership thereof, the amount of two times the then-effective purchase price per share, as adjusted for any stock dividends, combinations or splits with respect to such shares, plus all declared but unpaid dividends on such share for each share of Series A Preferred Stock then held by them |
| After receiving this amount, the holders of the Series A Preferred Stock shall participate on an as-converted basis with the holders of common stock in any of our remaining assets |
| 18 ______________________________________________________________________ The preferential treatment accorded the Series A Preferred Stock might reduce the value of the common stock |
| If we are unsuccessful in establishing additional strategic alliances, our ability to develop and market products and services may be damaged |
| Entering into strategic alliances for the development and commercialization of products and services based on our discoveries is an important element of our business strategy |
| We anticipate entering into additional collaborative arrangements with Alticor and other parties in the future |
| We face significant competition in seeking appropriate collaborators |
| In addition, these alliance arrangements are complex to negotiate and time-consuming to document |
| If we fail to maintain existing alliances or establish additional strategic alliances or other alternative arrangements, then our ability to develop and market products and services may be damaged |
| In addition, the terms of any future strategic alliances may be unfavorable to us or these strategic alliances may be unsuccessful |
| If we fail to obtain an adequate level of reimbursement for our products or services by third-party payers, then our products and services may not be commercially viable |
| The availability and levels of reimbursement by governmental and other third-party payers affects the market for any healthcare service |
| These third-party payers continually attempt to contain or reduce the costs of healthcare by challenging the prices charged for medical products and services |
| Should we enter the medical channel, our ability to successfully commercialize our existing genetic risk assessment test and others that we may develop depends on obtaining adequate reimbursement from third-party payers |
| The extent of third-party payer reimbursement may likely heavily influence physicians’ and dentists’ decisions to recommend genetic risk assessment tests, as well as patients’ elections to pursue testing |
| If reimbursement is unavailable or limited in scope or amount, then we may not be able sell our products and services at a profit |
| In particular, third-party payers tend to deny reimbursement for services which they determine to be investigational in nature or which are not considered “reasonable and necessary” for diagnosis or treatment |
| To date, few third-party payers have agreed to reimburse patients for genetic risk assessment tests, and we do not know if third-party payers will, in the future, provide full reimbursement coverage for these genetic tests |
| If third-party payers do not provide adequate reimbursement coverage, then individuals may choose to directly pay for the test |
| If both third-party payers and individuals are unwilling to pay for the tests, then the number of tests we can sell may be significantly decreased, resulting in reduced anticipated sales and additional losses |
| If we fail to obtain patent protection for our products and preserve our trade secrets, then competitors may develop competing products and services, which will likely decrease our sales and market share |
| Our success will partly depend on our ability to obtain patent protection, in the United States and in other countries, for our products and services |
| In addition, our success will also depend upon our ability to preserve our trade secrets and to operate without infringing upon the proprietary rights of third parties |
| We own rights in twenty issued US patents and have a number of additional US patent applications pending |
| We have also been granted a number of corresponding foreign patents and have a number of foreign counterparts of our US patents and patent applications pending |
| Our patent positions, and those of other pharmaceutical and biotechnology companies, are generally uncertain and involve complex legal, scientific and factual questions |
| Our ability to develop and commercialize products and services depends on our ability to: · Obtain patents; · Obtain licenses to the proprietary rights of others; 19 ______________________________________________________________________ · Prevent others from infringing on our proprietary rights; and · Protect trade secrets |
| Our pending patent applications may not result in issued patents and any issued patents may never afford meaningful protection for our technology or products |
| Further, others may develop competing products, which avoid legally infringing upon, or conflicting with, our patents |
| In addition, competitors may challenge any patents issued to us, and these patents may subsequently be narrowed, invalidated or circumvented |
| We also rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements |
| The third parties we contract with may breach these agreements, and we might not have adequate remedies for any breach |
| Additionally, our competitors may discover or independently develop our trade secrets |
| Third parties may own or control patents or patent applications and require us to seek licenses, which could increase our costs or prevent us from developing or marketing our products or services |
| We may not have rights under patents or patent applications that are related to our current or proposed products |
| Third parties may own or control these patents and patent applications in the United States and abroad |
| Therefore, in some cases, to develop or sell any proposed products or services, with patent rights controlled by third parties, our collaborators or we may seek, or may be required to seek, licenses under third-party patents and patent applications |
| If this occurs, we may have to pay license fees or royalties or both to the licensor |
| If licenses are not available to us on acceptable terms, our collaborators or we may be prohibited from developing or selling our products or services |
| If third parties believe our products or services infringe upon their patents, they could bring legal proceedings against us seeking damages or seeking to enjoin us from testing, manufacturing or marketing our products or services |
| Any litigation could result in substantial expenses to us and significant diversion of attention by our technical and management personnel |
| Even if we prevail, the time, cost and diversion of resources of patent litigation would likely damage our business |
| If the other parties in any patent litigation brought against us are successful, in addition to any liability for damages, we may have to cease the infringing activity or obtain a license |
| Technological changes may cause our products and services to become obsolete |
| Our competitors may develop risk assessment tests that are more effective than our technologies or that make our technologies obsolete |
| Innovations in the treatment of the diseases in which we have products or product candidates could make our products obsolete |
| These innovations could prevent us from selling, and significantly reduce or eliminate the markets for, our products |
| We may be prohibited from fully using our net operating loss carryforwards, which could affect our financial performance |
| As a result of the losses incurred since inception, we have not recorded a federal income tax provision and have recorded a valuation allowance against all future tax benefits |
| As of December 31, 2005, we had gross net operating loss and research tax credit carryforwards of approximately dlra43dtta0 million and dlra870cmam000, respectively, for federal income tax purposes, expiring in varying amounts through the year 2025 |
| As of December 31, 2005, we had gross net operating loss and research tax credit carryforwards of approximately dlra20dtta0 million and dlra330cmam000, respectively, for state income tax purposes, expiring in varying amounts through the year 2010 |
| Our ability to use these net operating loss and credit carryforwards is subject to restrictions contained in the Internal Revenue Code which provide for limitations on our utilization of our net operating loss and credit carryforwards following a greater than 50prca ownership change during the 20 ______________________________________________________________________ prescribed testing period |
| We have experienced two such ownership changes |
| As a result, all of our net operating loss carryforwards are limited in utilization |
| The annual limitation may result in the expiration of the carryforwards prior to utilization |
| In addition, in order to realize the future tax benefits of our net operating loss and tax credit carryforwards, we must generate taxable income, of which there is no assurance |
| We could become subject to intense competition from other companies, which may damage our business |
| Our industry is highly competitive |
| Our potential competitors in the United States and abroad are numerous and include major pharmaceutical and diagnostic companies, specialized biotechnology firms, universities and other research institutions |
| Many of our competitors have considerably greater financial resources, research and development staffs, facilities, technical personnel, marketing and other resources than we do |
| Furthermore, many of these competitors are more experienced than we are in discovering, commercializing and marketing products |
| These greater resources may allow our competitors to discover important genes or genetic markers before we do |
| If we do not discover gene variants that influence disease risk and commercialize these discoveries before our competitors, then our ability to generate sales and revenue will be reduced or eliminated, and could make our products obsolete |
| We expect competition to intensify in our industry as technical advances are made and become more widely known |
| We are subject to government regulation which may significantly increase our costs and delay introduction of future products |
| Changes in existing regulations at either the state or federal level could require advance regulatory approval of genetic risk assessment tests, resulting in a substantial curtailment or even prohibition of our activities without regulatory approval |
| If our genetic tests ever require regulatory approval, on either a state or federal level, then the costs of introduction may increase and marketing and sales of products may be significantly delayed |
| We anticipate that the testing procedure itself will be performed primarily in our own genetic testing laboratory, which currently is registered and will need to be certified under the auspices of the Clinical Laboratory Improvement Act of 1988 (CLIA), administered by the Health Care Financing Administration |
| We anticipate there will also be additional state and local regulations governing the operation of this laboratory |
| An inability to obtain or maintain our CLIA certification or any applicable state or local certification would reduce our revenue and increase our net losses |
| Although it has not done so, the FDA could assert pre-market review of genetic tests |
| We may be subject to product liability claims that are costly to defend and that could limit our ability to use some technologies in the future |
| The design, development, manufacture and use of our genetic risk assessment tests involve an inherent risk of product liability claims and associated adverse publicity |
| Producers of medical products face substantial liability for damages in the event of product failure or allegations that the product caused harm |
| We currently maintain product liability insurance, but it is expensive and difficult to obtain, may not be available in the future on economically acceptable terms and may not be adequate to fully protect us against all claims |
| We may become subject to product liability claims that, even if they are without merit, could result in significant legal defense costs |
| We could be held liable for damages in excess of the limits of our insurance coverage, and any claim or resulting product recall could create significant adverse publicity |
| Ethical, legal and social issues related to genetic testing may reduce demand for our products |
| Genetic testing has raised issues regarding the appropriate utilization and the confidentiality of information provided by genetic testing |
| Genetic tests for assessing a person’s likelihood of developing a chronic disease have focused public attention on the need to protect the privacy of genetic information |
| For example, concerns have been expressed that insurance carriers and employers may use these tests to 21 ______________________________________________________________________ discriminate on the basis of genetic information, resulting in barriers to the acceptance of genetic tests by consumers |
| This could lead to governmental authorities prohibiting genetic testing or calling for limits on or regulating the use of genetic testing, particularly for diseases for which there is no known cure |
| Our dependence on key executives and scientists could adversely impact the development and management of our business |
| Our success substantially depends on the ability, experience and performance of our senior management and other key personnel |
| If we lose one or more of the members of our senior management or other key employees, it could damage our development programs and our business |
| In addition, our success depends on our ability to continue to hire, train, retain and motivate skilled managerial and scientific personnel |
| The pool of personnel with the skill that we require is limited |
| Competition to hire from this limited pool is intense |
| We compete with numerous pharmaceutical and healthcare companies, as well as universities and nonprofit research organizations in the highly competitive Boston, Massachusetts’s business area |
| Philip R Reilly, our Chief Executive Officer, Dr |
| Kenneth Kornman, our President and Chief Scientific Officer, or Dr |
| Ramon Mohanlal, our Chief Medical Officer, could delay our research and development programs or otherwise damage our business |
| In March 2003, we entered into employment agreements with three-year terms with Dr |
| Reilly and Dr |
| Each of these employees can terminate his employment upon 30 days notice |
| We do not maintain key man life insurance on any of our personnel |
| In a circumstance in which Alticor enters a business in competition with our own, our Directors might have a conflict of interest |
| In conjunction with our strategic alliance with Alticor, we have agreed to certain terms for allocating opportunities as permitted under Section 122(17) of the Delaware General Corporation Law |
| This agreement, as set forth in the Purchase Agreement, regulates and defines the conduct of certain of our affairs as they may involve Alticor as our majority stockholder and its affiliates, and the powers, rights, duties and liabilities of us and our officers and directors in connection with corporate opportunities |
| Except under certain circumstances, Alticor and its affiliates have the right to engage in the same or similar activities or lines of business or have an interest in the same classes or categories of corporate opportunities as we do |
| If Alticor or one of our directors appointed by Alticor, and its affiliates acquire knowledge of a potential transaction or matter that may be a corporate opportunity for both Alticor and its affiliates and us, to the fullest extent permitted by law, Alticor and its affiliates will not have a duty to inform us about the corporate opportunity or be liable to us or to you for breach of any fiduciary duty as a stockholder of ours for not informing us of the corporate opportunity, keeping it for its own account, or referring it to another person |
| Additionally, except under limited circumstances, if an officer or employee of Alticor who is also one of our directors is offered a corporate opportunity, such opportunity shall not belong to us |
| In addition, we agreed that such director will have satisfied his duties to us and not be liable to us or to you in connection with such opportunity |
| The terms of this agreement will terminate on the date that no person who is a director, officer or employee of ours is also a director, officer, or employee of Alticor or an affiliate |
| We do not expect to pay dividends for the foreseeable future and you should not expect to receive any funds without selling your shares of common stock, which you may only be able to do at a loss |
| We have never declared or paid any cash dividends on our capital stock |
| We currently intend to retain any earnings for use in the operation and expansion of our business and do not anticipate paying any cash 22 ______________________________________________________________________ dividends on our common stock in the foreseeable future |
| Therefore, you should not expect to receive any funds without selling your shares, which you may only be able to do at a loss |